Case reg Doc 231 Filed 10/09/14 Entered 10/09/14 17:27:22

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1 UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK x In re: KANGADIS FOOD INC. Chapter 11 d/b/a The Gourmet Factory, Case No (REG) Debtor x FIRST AMENDED DISCLOSURE STATEMENT FOR PLAN OF REORGANIZATION FOR KANGADIS FOOD INC. UNDER CHAPTER 11 OF THE BANKRUPTCY CODE THIS IS NOT A SOLICITATION OF ACCEPTANCES OR REJECTIONS OF THE PLAN. ACCEPTANCES OR REJECTIONS MAY NOT BE SOLICITED UNTIL THE DISCLOSURE STATEMENT HAS BEEN APPROVED BY THE BANKRUPTCY COURT. THE DISCLOSURE STATEMENT IS BEING SUBMITTED FOR APPROVAL TO THE BANKRUPTCY COURT BUT HAS NOT YET BEEN APPROVED BY THE BANKRUPTCY COURT AT THIS TIME. THE INFORMATION CONTAINED HEREIN SHOULD NOT BE RELIED UPON FOR ANY PURPOSE BEFORE A DETERMINATION BY THE BANKRUPTCY COURT THAT THIS DISCLOSURE STATEMENT CONTAINS ADEQUATE INFORMATION WITHIN THE MEANING OF BANKRUPTCY CODE SECTION SILVERMANACAMPORA LLP Attorneys for Kangadis Food Inc. 100 Jericho Quadrangle, Suite 300 Jericho, New York (516) Adam L. Rosen Sheryl P. Giugliano Brian Powers Dated October 8, 2014

2 BANKRUPTCY COURT APPROVAL OF THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE BANKRUPTCY COURT APPROVAL, OR ITS RECOMMENDATION ON THE MERITS OF DEBTOR S PLAN OF REORGANIZATION I. INTRODUCTION Kangadis Food Inc. (the Debtor ) submits this First Amended Disclosure Statement (the "Statement") pursuant to section 1125 of title 11, United States Code (the Bankruptcy Code ). The Statement is provided to all of the Debtor s known creditors in order to disclose the information deemed to be material, important and necessary for the Debtor s creditors to arrive at a reasonably informed decision in exercising their rights to vote on the First Amended Plan of Reorganization proposed by the Debtor (the "Plan"). 1 A copy of the Plan is annexed hereto as Exhibit A. Also accompanying the Plan and Statement is a creditor's voting ballot (the "Ballot") for the acceptance or rejection of the Plan, together with a copy of the Order approving the Statement and Scheduling a Hearing on Confirmation of the Plan. Definitions and Exhibits Definitions. The definitions and designations of terms and names in the Plan apply to the Statement and you should refer to the Plan for such definitions and designations. Exhibits. All Exhibits to the Statement are incorporated as if fully set forth and are a part of the Statement. Notice to Creditors The Debtor believes that confirmation and implementation of the Plan is in the best interest of the Debtor s estate and its creditors. Based on the liquidation analysis annexed hereto as Exhibit B (the Liquidation Analysis ), the Debtor believes that the distributions provided for in this Plan exceed the distributions that unsecured creditors would receive if the Debtor s assets were liquidated. For this reason, the Debtor believes that approval of the Plan is the best opportunity for Creditors to receive payments with respect to Allowed Claims. Pursuant to Bankruptcy Code 1125, on October [ ], 2014, the Bankruptcy Court approved this Statement for submission to the holders of Claims against, or Interests in, the Debtor. On 2014 at a.m. a hearing will be held to consider confirmation of the Plan before the Honorable Robert E. Grossman, United States Bankruptcy Judge, United States Bankruptcy Court, Alfonse M. D Amato Federal Courthouse, Courtroom 860, 290 Federal Plaza, Central Islip, New York The Bankruptcy Court has directed that objections, if any, to confirmation of the Plan be served and filed on or before 4:00 p.m. on, The Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court without further notice except for the filing of a notice of the adjourned date on the Bankruptcy Court's docket, or the announcement of the adjourned date at the Confirmation Hearing (or at any subsequent adjourned date for the Confirmation Hearing). Creditors entitled to vote may vote on the Plan by filling out and mailing the accompanying Ballot to SilvermanAcampora LLP ( SilvermanAcampora ), attorneys for the 1 Capitalized terms not otherwise defined in this Statement shall have the meanings set forth in the Plan.

3 Debtor, 100 Jericho Quadrangle, Suite 300, Jericho, New York 11753, Attention: Sheryl P. Giugliano, so the Ballot is received on or before 2014 at 4:00 p.m. Under the Bankruptcy Code, acceptance of a plan by a class of claims occurs when holders of at least two-thirds (2/3) in dollar amount and more than one-half (1/2) in number of the allowed claims of that class that cast ballots for acceptance or rejection of the plan, vote to accept the plan. Thus, acceptance of the Plan by a particular class will occur only if at least two-thirds in dollar amount and a majority in number of the holders of the claims in that class, that cast their Ballots, vote to accept the Plan. A vote may be disregarded if the Bankruptcy Court determines, after notice and a hearing, that such acceptance or rejection was not solicited or produced in good faith or in accordance with the provisions of the Bankruptcy Code. Bankruptcy Code 1129(b) permits confirmation of the Plan, notwithstanding rejection by one or more Classes of Claims, if: (i) at least one impaired Class has accepted the Plan; and (ii) the Bankruptcy Court finds that the Plan does not discriminate unfairly, and is fair and equitable with respect to the rejecting Class. This procedure is generally referred to as "cram-down." The purpose of this Statement is to inform all Claim holders of the information deemed to be material, important and necessary in order to make an informed judgment about the Plan, and to vote for the acceptance or rejection of the Plan, where voting is necessary. The approval by the Bankruptcy Court of this Statement does not constitute a recommendation by the Bankruptcy Court as to the merits of the Plan, only that the Statement contains "adequate information" from which creditors may form an opinion as to the merits of the Plan. The financial information contained in this Statement has not been subject to a certified audit. Accordingly, the Debtor is unable to warrant or represent that the information is accurate and complete in all respects, although the Debtor has used its best efforts to set forth information and disclosures which are complete and accurate. This Statement has been prepared on the basis of assumptions which the Debtor believes to be reasonable, however, there can be no assurance that these assumptions will prove to have been accurate. II. EXPLANATION OF CHAPTER 11 Chapter 11 is the principal reorganization chapter of the Bankruptcy Code. Under chapter 11, a debtor may reorganize or liquidate its business and assets. Since the Petition Date, the Debtor has managed its affairs as debtor and debtor-inpossession under Bankruptcy Code 1107 and The formulation and confirmation of a plan of reorganization or liquidation is the principal purpose of a chapter 11 case. A chapter 11 plan sets forth the means of satisfying or discharging the claims against or interests in a chapter 11 debtor. Chapter 11 does not require that each holder of a claim against a debtor vote in favor of a plan in order for the Bankruptcy Court to approve a plan. If any class of claimants is impaired by a plan, the plan must be accepted by at least one "impaired" class of claims or interests. A claim or interest is deemed impaired if the plan provides that the claimant: (i) will not be repaid in full; (ii) will have any of its legal rights altered; or (iii) has an interest that is adversely affected. The holder of an impaired claim or interest is entitled to vote to accept or reject the plan if the claim or interest is an allowed claim or interest under Bankruptcy Code 502, or temporarily allowed for voting purposes under Bankruptcy Rule

4 III. THE DEBTOR PRIOR TO THE CHAPTER 11 CASE Description of the Debtor s Business The Debtor is a food import and distribution company formed in The Debtor is a leading importer of olives and other European delicacies, and is a leading distributor of olive oil. The Debtor sells its products under the brand names Capatriti, Porto, Olio Villa, Zorba, and Kivotos. The Debtor s customers consist primarily of wholesale vendors who then sell direct to consumers. For the past six years, the popularity of the Debtor s olive oil product sold under the brand name Capatriti has grown over time, and it is one of the leading brands in the New York metropolitan area. The Debtor employs 51 people, and operates from a 75,000 square foot facility located in Hauppauge, New York, that serves as a warehouse, production facility, and shipping center. Themistoklis Kangadis ( T. Kangadis ) is the Debtor s Chief Executive Officer and President, and his father, Aristidis Kangadis is the Debtor s Senior Vice President. Dennis DeTore is the Debtor s Chief Financial Officer, and Michael Rizzo is the Debtor s Controller. Themistoklis Kangadis mother, Andromachi Kangadis, is Secretary of the Debtor, but she is not an employee of the Debtor. Themistoklis Kangadis 49.50% of the Debtor s shares, Aristidis Kangadis owns 25.25% of the Debtor s shares, and Andromahi Kangadis owns 25.25% of the Debtor s shares, KFM is a non-debtor affiliate of the Debtor which owns the real property and building from which the Debtor operates its business in Hauppauge, New York, pursuant to a lease agreement. KFM is not liable for the debts of the Debtor, nor is it a debtor before the Bankruptcy Court. KFM owes the Debtor $684, which will be repaid to the Debtor after the Effective Date. Exhibit D to this Disclosure Statement provides that $500, of the $684, amount will be paid to the Debtor on the Effective Date. The remaining amount will be paid as soon as practicable after the the Effective Date. Loan from Citibank In or about January 2012, the Debtor opened a credit facility with Citibank in the original maximum amount of $3,000, On or about March 7, 2013, Citibank increased the maximum borrowing amount to $6,000,000.00, as evidenced by a Master Note, pursuant to which Citibank has made loans, advances, extensions of credit, and other financial accommodations (the Loan ). The Loan is secured by a first-priority security interest in all assets and personal property of the Debtor, pursuant to a General Security Agreement and duly filed UCC-1 financing statements. The maximum availability under the Loan is determined according to a formula based upon, among other things, the Debtor s accounts receivable, inventory, and previous amounts extended under the Loan. The purpose of the Loan is for purchase of inventory and other working capital. T. Kangadis and Aristidis Kangadis personally guaranteed repayment of all loans, extensions of credit and financial accommodations provided under the Loan, pursuant to written guaranties. On September 13, 2013, Citibank reduced the maximum borrowing amount available under the Loan to $5,000, In March 2014, the Loan matured and Citibank further reduced the maximum borrowing amount available under the Loan to $3,500, Citibank did not renew the Loan and, since March 2014, the Debtor has been unable to borrow money under the Loan. 4

5 As of the Petition Date, the Debtor was indebted to Citibank in the amount of $3,500, As of the time of filing of the Amended Plan, Citibank is owed $2,800, The Bankruptcy Court has entered orders authorizing the Debtor to use Citibank s cash collateral subject to certain terms and restrictions. (See ECF Doc. Nos. 37 and 93). Under the Plan, Citibank s Allowed Claim will be paid in full on or before thirty (30) days after the Effective Date using the proceeds of an exit credit facility to be provided by Citibank, or within ninety (90) days after the Effective Date utilizing the proceeds of a loan to be provided by a new lender. The Debtor s Liabilities and Assets Although the Debtor s core business remains profitable, the Class Action lawsuit commenced against the Debtor in April 2013, described more fully below, has forced the Debtor to incur more than approximately $1.4 million in litigation defense costs over the past sixteen months. 2 For the year ending December 31, 2013, the Debtor incurred losses of approximately $4.4 million. (See Projections annexed hereto as Exhibit C). The Debtor filed the Chapter 11 Case to reorganize, liquidate the amount of the Class Claim, and reduce its litigation costs by asking the Bankruptcy Court to estimate its liability, if any, to the holders of the Class Claim, and to provide a method to pay its undisputed creditors. The Debtor projects that if the Class Action proceeds to trial, the Debtor will incur approximately $750,000.00, or more, in additional litigation costs in 2014 and In the Class Action, District Court Judge Rakoff entered an order certifying the class, but has not made a finding of liability or damages. Originally, Judge Rakoff scheduled a jury trial to begin September 3, 2014, which might have lasted up to two weeks. The ability of the Debtor to operate its business and pay its ongoing expenses would have been severely hampered if the Debtor did not file the Chapter 11 Case, and instead paid the attorneys fees and expenses associated with the two-week jury trial. But for these litigation costs, the Debtor s operations are profitable, and the Debtor s Plan provides that the cash flow from the Debtor s operations will be used to pay Allowed Claims, including any Allowed Class Claim. As of the December 31, 2013, the Debtor, on an unaudited basis, had total assets of approximately $12,259, and total liabilities, including secured debt to Citibank, of approximately $6,136,456.00, which amount does not include any disputed claim relating to the Class Action. Litigation The Trade Association Action In or about February 2013, the North American Olive Oil Association ( NAOOA ), a trade association representing the interests of the olive oil industry, commenced an action against the Debtor for violating Section 43(a) of the Lanham Act, 15 U.S.C. 1125(a), and for deceptive acts and practices and false advertising under New York General Business Law 349 and 350, titled North American Olive Oil Association (NAOOA) v. Kangadis Food Inc., Index No. 13 Civ. 868, in the United States District Court for the Southern District of New York. 2 The $1.4 million in litigation defense costs includes the Debtor s litigation costs incurred in connection with the NAOOA Action, defined below. 5

6 NAOOA alleged that the Debtor labeled its bottles and tins produced and sold under the Capatriti brand, as 100% pure olive oil, even though the Capatriti brand of oil was allegedly composed of olive pomace oil. The Debtor disputed the allegations made by NAOOA. In or about July 2013, the Debtor and NAOOA settled the NAOOA action and entered into a confidential settlement agreement. As a result of the publicity surrounding the NAOOA action, a number of customers cancelled their orders for the Debtor s olive oil products. The Debtor believes that its products meet applicable regulatory standards of the FDA, USDA and International Olive Oil Council. The Class Action On April 8, 2013, Joseph Ebin and Yeruchum Jenkins commenced a class action against the Debtor (the Class Action ) in the United States District Court for the Southern District of New York, entitled Joseph Ebin, Yeruchum Jenkins, et al. v. Kangadis Food Inc., d/b/a The Gourmet Factory, Index No. 1:13-cv (JSR), asserting causes of action for fraud and breach of warranty under both New York and New Jersey law relating to the Debtor s alleged misbranding and sale of olive-pomace oil as olive oil. The Class Action relates only to the Debtor s Capatriti brand of oil. 3 The Debtor has disputed, and continues to dispute, that it has any liability to the plaintiffs in the Class Action. As stated above, Judge Rakoff certified the Class Action under Rule 23 of the Federal Rules of Civil Procedure, over the Debtor s objection. On December 11, 2013, Judge Rakoff issued an order granting class certification, and on February 25, 2014, issued a memorandum opinion setting forth the reasons for that ruling, and a separate memorandum order denying the Debtor s motion for summary judgment. Among other things, Judge Rakoff found that there are triable issues of fact relating to whether olive-pomace oil is olive oil. Judge Rakoff did not determine: (i) whether the Debtor is liable, and if so, the amount of damages, if any; or (ii) identification of the individuals entitled to damages. On July 30, 2014, Class Plaintiffs filed a proof of claim in the amount of $261,640, against the Debtor s estate, designated Claim No. 14 on the Debtor s claims register. On September 19, 2014, the Debtor filed an objection to the Class Claim. The Ebin II Action On February 8, 2014, the plaintiffs in the Class Action filed a separate putative class action lawsuit against T. Kangadis, Aristidis Kangadis, Andromahi Kangadis, and KFM in the U. S. District Court for the Southern District of New York (Case No. 14 CV 1324 (JSR)) (the Ebin II Action ). The complaint in the Ebin II Action alleges claims for alter-ego liability, piercing the corporate veil, fraud, negligent misrepresentation, deceptive acts or practices and breach of warranty. The defendants dispute the allegations. On April 18, 2014, by order of U. S. District Judge Rakoff, the Ebin II Action was dismissed without prejudice because the complaint improperly revealed information designated as Confidential under a protective order, and violated an order of the District Court dated November 5, 2013, directing that any such complaint could be filed only after the plaintiffs in the Class Action first obtained a judgment against the Debtor. After the Debtor filed its Chapter 11 Case in the 3 There is also a pending action filed in the U.S. District Court for New Jersey titled Toscano v. Kangadis Food, Inc., which is stayed as a result of the Class Action. 6

7 Bankruptcy Court, Judge Rakoff entered an order permitting the plaintiffs to re-file the Ebin II Action. The plaintiffs re-filed the Ebin II Action on June 11, The Debtor believes that the claims set forth in the Ebin II Action are claims that belong to the Debtor s estate, and can only be properly brought by the Debtor. The plaintiffs who filed the Ebin II Action allege that they have direct claims against certain of the defendants in the Ebin II Action which are not part of the Debtor s estate. The Debtor believes that the plaintiffs in the Ebin II Action may pursue direct claims in the Ebin II Action, but not claims that are property of the Debtor s estate. On September 18, 2015, Judge Rakoff entered an order which, among other relief, dismissed the Direct Claims in the Ebin II Action. The Estimation Motion Prior to the Petition Date, the Debtor used its best efforts to settle the Class Action claim, but was unable to do so. Accordingly on the Petition Date, the Debtor filed a motion under Bankruptcy Code section 502(c) asking the Bankruptcy Court to approve procedures under which the Class Claim would be estimate purposes of distribution in the Chapter 11 Case. On July 16, 2014, the Bankruptcy Court held a hearing on the Estimation Motion and ruled that it was premature to decide that motion until the plaintiffs in the Class Action file a proof of claim in the Chapter 11 Case. On September 25, 2014, the Bankruptcy Court granted the Estimation Motion and entered an order establishing estimation procedures. The Debtor then filed a motion in limine seeking to exclude certain materials submitted by Class Counsel in connection with the estimation hearing. The estimation procedures order provides that the estimation hearing with respect to the Class Claim will be held on November 24, The Motion to Dismiss and/or Grant Relief from the Automatic Stay On June 27, 2014, the plaintiffs in the Class Action filed their Motion to Dismiss the Debtor s Petition for Bankruptcy or, in the Alternative, for Relief from the Automatic Stay (the Motion to Dismiss ) (ECF Doc. No. 78). On July 16, 2014, after full briefing and a hearing, the Bankruptcy Court denied the Motion to Dismiss and, on July 28, 2014, the Bankruptcy Court issued supplemental findings (ECF Doc. No. 144) regarding, among other things, the Motion to Dismiss. On July 30, 2014, plaintiffs in the Class Action filed a Notice of Appeal of the Bankruptcy Court s denial of the Motion to Dismiss. Complaint and Motion to Stay the Ebin II Action On September 30, 2014, the Debtor filed an adversary proceeding complaint against the plaintiffs in the Class Action (Adv. Pro. No (REG)). The Debtor s complaint seeks to have the Court enjoin the prosecution of the Ebin II Action with respect to certain claims that the Debtor believes are property of its estate. On September 30, 2014, the Debtor also filed a motion in that adversary proceeding seeking to immediately enjoin prosecution of the Ebin II Action. A hearing on that motion is scheduled for October 15,

8 IV. THE DEBTOR S CHAPTER 11 CASE Commencement and Conduct of the Chapter 11 Case After the Petition Date, the Debtor, as debtor in possession, has been authorized to manage its business and its assets in the ordinary course of business without specific Bankruptcy Court authorization. In connection with the Chapter 11 Case, the Debtor was provided professional services by: (i) SilvermanAcampora, as general bankruptcy counsel: (ii) WeiserMazers LLP ( Weiser ) as its accountants; (iii) Hoffman & Baron LLP, as special counsel; and (iv) and Fox Rothschild LLP, as special counsel. The employment of SilvermanAcampora was approved by the Bankruptcy Court on July 15, 2014, effective as of the Petition Date (ECF Doc. No. 120). The employment of Weiser was approved by the Bankruptcy Court on July 15, 2014, effective as of the Petition Date (ECF Doc. No. 123). The employment of Fox Rothschild LLP as special counsel was approved by the Bankruptcy Court on July 15, 2014, effective as of the Petition Date (ECF Doc. No. 122). The employment of Hoffman & Baron LLP, as special counsel was approved by the Bankruptcy Court on July 15, 2014, effective as of the Petition Date (ECF Doc. No. 121). First Day Motions On the Petition Date, the Debtor filed the following motions seeking relief critical to avoid irreparable harm to the Debtor and its business (collectively, the First Day Motions ). On June 10, 2014, the Bankruptcy Court conducted hearings to consider the First Day Motions designed to facilitate the Debtor s transition into chapter 11 by approving certain regular business practices that may have not been specifically authorized under the Bankruptcy Code and/or required specific Bankruptcy Court approval. A. Application for Entry of Order Authorizing Payment of Certain Prepetition Accrued Emergency Application for Orders (1) Authorizing the Use of Cash Collateral Pursuant to U.S.C. 105, 361, 363, and 364, (2) Scheduling a Final Hearing and Establishing Notice Requirements Pursuant to Bankruptcy Rules 2002 and 4001, and (3) Granting Related Relief (ECF Doc. No. 13) (the Cash Collateral Motion ). The Bankruptcy Court approved the Cash Collateral Motion on a second interim basis on July 7, 2014 (ECF Doc. No. 93). The motion requests authority for the Debtor to utilize the cash collateral of its secured lender, Citibank, during its chapter 11 case. The Court has scheduled a hearing for July 30, 2014, to consider approval of the Cash Collateral Motion on a final basis. B. Wages, Salaries, Commissions, and Related Taxes and Employee Benefits, and Authorizing and Directing Bank to Honor Employee and Independent Contractor Wage, Salary, and Commission Checks (ECF Doc. No. 6): The Bankruptcy Court approved the motion on a final basis on July 3, 2014 (ECF Doc. No. 89). The motion sought authority to pay certain pre-petition wages, salaries, commissions, and related benefits due to the Debtor s 8

9 employees (collectively, the Wages ). The Debtor sought this relief out of concern that, if the Wages were not paid on a timely basis, the Debtor s employees might refuse to work. None of the Wages were greater than the statutory limit of $12, as provided under Bankruptcy Code 507. C. Motion for Order Pursuant to 11 U.S.C. Sections 105(a), 345(b), and 363(c) Authorizing Debtor to (I) Continue Use of Existing Cash Management System, and (II) Maintain Existing Accounts and Business Forms, and Granting Related Relief (ECF Doc. No. 8). The Bankruptcy Court approved the motion on a final basis on July 3, 2014 (ECF Doc. No. 90). The motion sought authority to continue the use of the Debtor s existing business forms and the Debtor s bank accounts. D. Motion for Order (I) Pursuant to 11 U.S.C. Section 503(b)(1)(A) Granting Administrative Status to Undisputed Claims for Goods-in-Transit as of Petition Date, (II) Authorizing Payment Pursuant to 11 U.S.C. Sections 105(a) and 363(c)(1), and Bankruptcy Rule 6004 of Foreign Suppliers Administrative Claims, Prepetition Freight Forwarding Charges, Customs Brokers Fees, and Common Carrier Charges (ECF Doc. No. 9). The Bankruptcy Court approved the motion on a final basis on July 3, 2014 (ECF Doc. No. 91). The motion sought authority for the Debtor to pay for (i) goods that it had ordered prior to the Petition date, but had not yet been delivered, (ii) shipping, customs, and carrier charges that are routine in the Debtor s business; and (iii) certain claims of its foreign suppliers. E. Debtor s Motion for Order Authorizing Continuation of Certain Customer Practices (ECF Doc. No. 10). The Bankruptcy Court approved the motion on June 13, 2014 (ECF Doc. No. 53). The motion sought authority for the Debtor to continue to honor certain of its customer practices, including rebates, warranties, refunds, returns, and exchanges. The Debtor sought this relief to ensure the continued loyalty of its customers. F. Motion for Order Pursuant to Bankruptcy Code sections 105(a) and 366 (I) Prohibiting Utilities from Altering, Refusing, or Discontinuing Service, (II) Deeming Utilities Adequately Assured of Future Payment, and (III) Establishing Procedures for Determining Adequate Assurance of Payment (ECF Doc. No. 7). The Bankruptcy Court approved the motion on June 13, 2014 (ECF Doc. No. 52). The motion sought to prohibit certain of the Debtor s utilities provides from altering, refusing, or discontinuing service to the Debtor and to establish procedures for those utilities to request deposits from the Debtor as adequate assurance of future payment. 9

10 Hearings to Consider Final Orders for First Day Motions On July 2, 2014, the Bankruptcy Court held a hearing to consider approval of the First Day Motions (with the exception of the Cash Collateral Motion, the Customer Practices Motion, and the Utilities Motion) on a final basis. Subsequent to the hearing, the Bankruptcy Court entered Final Orders for the (a) Wage Motion, (b) Freight Forwarding Motion, and (c) Bank Account Motion, and entered a Second Interim Order approving the Cash Collateral Motion. No Creditors Committee Appointed The United States Trustee made the determination not to appoint a creditors committee in the Chapter 11 Case pursuant to Bankruptcy Code Other Key Orders Granted During the Chapter 11 Case In addition to the First Day Orders, the Bankruptcy Court has entered the following additional orders: By Order dated June 25, 2014 (ECF Doc. No. 68), the Bankruptcy Court set August 5, 2014 as the last date for creditors to file claims against the Debtor that arose prior to the Petition Date. The last date for governmental entities to file claims is December 3, The Debtor has requested a supplemental bar date for holders of Class 4 Claims that have opted out of the Class Action. On July 16, 2014, the Bankruptcy Court denied the motions filed by the plaintiffs in the Class Action for an order dismissing the Chapter 11 Case, or alternatively to lift the automatic stay to permit the Class Action to proceed to trial in the District Court. On July 16, 2014, the Bankruptcy Court denied the Debtor s motion for an order enforcing the automatic stay and for an order determining that the claims set forth in Ebin II are property of the Debtor s bankruptcy estate. In addition, the Bankruptcy Court denied the Debtor s motion seeking sanctions against the plaintiffs in the Class Action for violation of the automatic stay. Potential Claims of the Debtor The Debtor will have the opportunity to pursue Avoidance Actions under the Bankruptcy Code if it chooses to do so. The Debtor might be entitled to recover certain transfers of property made prior to the filing of its Chapter 11 Case for the benefit of the Estate. Lawsuits to recover these transfers are defined in this Plan as the Avoidance Actions. Presently, the Debtor does not intend to pursue recovery of Avoidance Actins because the Debtor believes that (a) the aggregate amount of the recoverable transfers is relatively small, (b) the Debtor does not want to take positions which would be adverse to its ongoing vendors and suppliers, and (c) the legal fees and costs associated with pursuing Avoidance Actions would not justify the possible benefits. Postpetition Business Operations 10

11 Since the Petition Date, the Debtor has been operating its business in accordance with the budget established by the Debtor, and approved by Citibank in connection with the Cash Collateral Order. Since the Petition Date, the Debtor s sales and expenses have been within the permitted variances permitted in the Cash Collateral Order. For the year ending December 31, 2013, the Debtor lost approximately $4,447, million. In 2014, the Debtor projects it will have losses of approximately $739,000.00, mainly due to reorganization and restructuring costs, including professional fees. V. SUMMARY OF PLAN OF REORGANIZATION AND TREATMENT OF CLAIMS AND INTERESTS Below is a summary of the Plan. Parties in interest are urged to review the Plan in its entirety to determine how the Plan affects their rights as Creditors or Interest holders. The Plan provides for the reorganization of the Debtor by the: (i) estimation of the Class Claim for voting and distribution purposes by the Bankruptcy Court; (ii) use of the Effective Date Payment to pay in full all Administrative Expenses on the Effective Date; (iii) the extent that any portion of the Effective date Payment is remaining after payment in full of all Allowed Administrative Claims, then the Debtor will fund the GUC Fund and the Class Action Fund in accordance with the Plan; (iv) payment of quarterly payments of up to $200, per quarter payable from the Debtor s cash flow for a period of up to two (2) years after the Effective Date; and (iv) to the extent necessary, the contribution of new funds into the Debtor through the Kangadis Contribution in the amount of $500, on the Effective Date, and another $500, on the one (1) year anniversary of the Effective Date. On the Effective Date, the Debtor projects that it will have approximately $1 million in Cash, and to the extent necessary, $500, of the Kangadis Contribution to make the payments required under the Plan. These funds will be sufficient to pay the payments required under the Plan. To the extent necessary to pay Allowed Claims under the Plan, the Debtor will pay from its cash flow an aggregate of $200, per quarter, commencing on June 30, 2015, for up to two (2) years, to be used to fund the GUC Fund and the Class Action Fund in accordance with the Plan. The projections annexed hereto as Exhibit C demonstrate that the Debtor s business operations will support the payments required by the Plan. The Kangadis Contribution is being made to satisfy the requirements to confirm the Plan under Bankruptcy Code section If Class 4 and 5 Claims are not paid in full, then the Kangadis Contribution represents the new value contribution required by the Bankruptcy Code in order for T. Kangadis to receive the issuance of the 100% of the stock of the Reorganized Debtor. In addition, because the Debtor currently has the exclusive right to file a chapter 11 plan, the Debtor must provide an opportunity for third parties to offer greater consideration than the consideration being offered by the Kangadis Contribution in exchange for receiving issuance of the 100% stock interest in the Reorganized Debtor. For purposes of evaluating competing offers for that stock interest, the Kangadis Contribution will be considered to have a value of $1 million based on the fact that (i) up to $900, in Cash will be contributed to the Debtor, (ii) the Kangadis Guaranties will continue to be maintained, and (iii) the payment of the Affiliate Claims will be subordinated in right of payment to the payment of Allowed Class 4 and 5 Claims. Any Person interested in making an offer to purchase the 100% stock interest in the Reorganized Debtor shall (a) at least fifteen (15) days prior to the Confirmation Hearing, deliver a written offer to purchase the 100% stock interest in the Reorganized Debtor with a present value of at least $1,000, to SilvermanAcampora, (b) deliver a Cash deposit of at least $100, in 11

12 certified funds, or by wire transfer, to SilvermanAcampora, and (c) provide SilvermanAcampora with written evidence that the offeror has sufficient Cash, or a written loan commitment from a reputable and insured financial institution, in an amount sufficient to satisfy the Citibank Secured Claim in full, including all accrued interest and attorneys fees. Prior to the Confirmation Hearing, the Debtor will consider any valid offers made pursuant to the above requirements to purchase the 100% stock interest in the Reorganized Debtor. If the Debtor determines that a valid offer is made for the stock of the Reorganized Debtor, then the Debtor will hold an auction of the stock interest at the Confirmation Hearing to determine the highest and best offer. If no competing offer is made in accordance with the above procedures, then the Kangadis Contribution will be considered to be a sufficient and adequate new value contribution. The Debtor believes that the treatment of Creditors under the Plan provides creditors with substantially greater value compared to what they would receive in liquidation under chapter 7 of the Bankruptcy Code. The Debtor has prepared a liquidation analysis which is annexed hereto as Exhibit B. Unclassified Claims Certain types of claims are automatically entitled to specific treatment under the Bankruptcy Code. They are not considered impaired, and holders of such claims do not vote on the Plan. Holders of these claims may, however, object if, in their view, their treatment under the Plan does not comply with that required by the Bankruptcy Code. As such, the Debtor has not placed the following claims in any class: Statutory Fees Statutory fees, and any applicable interest thereon, are all fees payable pursuant to Chapter 123 of Title 28, United States Code, including but not limited to, all fees required to be paid by 28 U.S.C. 1930(a)(6) ( U.S. Trustee Fees ). U.S. Trustee Fees will accrue and be timely paid until the Case is closed. Any U.S. Trustee Fees owed on or before the Effective Date of this Plan will be paid in full on the Effective Date of the Plan. The Debtor shall remain responsible for any and all U.S. Trustee Fees that become due and shall pay same on a timely basis. The following chart lists the Debtor s estimated U.S. Trustee Fees and their proposed treatment under the Plan: Type Estimated Amount Owed Proposed Treatment U.S. Trustee Fees $20,000 Paid in full in Cash on the Effective Date of the Plan. Administrative Expenses Administrative Expenses are costs or expenses of administering the Debtor s Chapter 11 Case which are allowed under Bankruptcy Code 503. Administrative Expenses also include the value of any goods sold to the Debtor in the ordinary course of business and received within twenty 12

13 (20) days prior to the Petition Date. The Bankruptcy Code requires that all Administrative Expenses be paid on the Effective Date of the Plan, unless a particular claimant agrees to a different treatment. The following chart lists the Debtor s estimated administrative expenses and their proposed treatment under the Plan: Type Expenses Arising in the Ordinary Course of Business After the Petition Date Estimated Amount Owed $10,000 Proposed Treatment To the extent not paid in the ordinary course pursuant to the budget attached to the Cash Collateral Order, they will be paid in full on the Effective Date, in Cash, or upon such other terms as may be agreed upon by the holder of the Claim and the Debtor. The Value of Goods Received in the Ordinary Course of Business Within 20 Days Before the Petition Date Professional Fees, as approved by the Bankruptcy Court. $2,000 Paid as soon as reasonably practicable after the Effective Date, in Cash, or upon such other terms as may be agreed upon by the holder of the Claim and the Debtor. $800,000 Paid in full on the Effective Date, in Cash, upon such other terms as may be agreed upon by the holder of the Claim and the Debtor, or according to Bankruptcy Court order if such fees have not been approved by the Bankruptcy Court on the Effective Date of the Plan. Clerk s Office Fees $0 Paid in full on the Effective Date. Other administrative expenses $10,000 Paid in full on the Effective Date, in Cash, or upon such other terms as may be agreed upon by the holder of the Claim and the Debtor. TOTAL $822,000 Priority Tax Claims Priority tax claims are unsecured income, employment, and other taxes described by Bankruptcy Code 507(a)(8). Unless the holder of such a section 507(a)(8) priority tax claim agrees otherwise, it must receive the present value of such claim, on the Effective Date or in regular installments paid over a period not exceeding five (5) years from the Petition Date, plus interest at the prime rate of interest as published by the Wall Street Journal, or similar publication. The following chart lists the Debtor s estimated section 507(a)(8) priority tax claims and their proposed treatment under the Plan: Description (name and type of tax) Estimated Amount Owed Date of Assessment Treatment Tax Claims (estimated) $0 Total: $0 13 Paid over a five (5) year period pursuant to Bankruptcy Code 1129(a)(C)(ii), at the prime rate of interest.

14 Classes of Claims and Equity Interests The following are the classes set forth in the Plan, and the proposed treatment that they will receive under the Plan: Classes of Priority Unsecured Claims Certain priority claims that are referred to in Bankruptcy Code 507(a) are required to be placed in classes. The Bankruptcy Code requires that each holder of a priority claim receive Cash on the Effective Date of the Plan equal to the allowed amount of such claim; however, a class of holders of such claims may vote to accept different treatment. The Debtor proposes to pay priority unsecured claims over a twelve (12) month period following the Effective Date, without interest, which amounts may be pre-paid by the Debtor. Class # Description Impairment Treatment 1 Priority Non-Tax Claims $0 Impaired Paid in full within 12 months after the Effective Date, without interest. Classes of Secured Claims Allowed Secured Claims are claims secured by property of the Debtor s bankruptcy estate (or that are subject to setoff) to the extent allowed as secured claims under Bankruptcy Code 506. If the value of the collateral or setoffs securing the creditor s claim is less than the amount of the creditor s allowed claim, the deficiency will be treated as a General Unsecured Claim. Class # Description Impairment Treatment 2 Citibank Secured Claim in the amount of approximately $2.8 million Impaired Paid in full, in Cash, on or before 30 days after the Effective Date through an exit facility from Citibank, or within 90 days after the Effective Date utilizing the proceeds of a loan from a new lender. 3 Other Secured Claims (estimated to be $0) Unimpaired Paid in full in Cash on the Effective Date, or claimants will retain their liens against the Debtor s assets, and receive deferred Cash payments totaling the Allowed amount of their claims (with a value as of the Effective Date of the holder s Allowed Claims). 14

15 Classes of General Unsecured Claims General unsecured claims are not secured by property of the estate and are not entitled to priority under Bankruptcy Codes 507(a). The following chart identifies the Plan s proposed treatment of Classes 4, 5 and 6, which contain Class Claims, General Unsecured Claims, including Affiliate Claims against the Debtor: Class # Description Impairment Treatment 4 Class Claims (to be estimated by the Bankruptcy Court) Impaired The holders of Allowed Class 4 Claims shall receive, in full satisfaction of their Allowed Claims, Distributions from the Class Representative of the Cash and other payments to be deposited into the Class Action Fund. Until the Class Claim is estimated, the Debtor cannot estimate the percentage recovery to be received by holders of Allowed Class 4 Claims. The Debtor estimates that holders of Class 4 Claims will receive the recoveries set forth in the chart annexed hereto as Exhibit D. The holders of Class 4 Claims are impaired, and are entitled to vote on the Plan. 5 General Unsecured Claims (approximately $400,000) Impaired Each holder of an Allowed Class 5 General Unsecured Claim shall receive their Pro Rata Share of the Cash and other payments to be deposited into the GUC Fund in full satisfaction of their Allowed Claims. The Debtor estimates that the Holders of Allowed Class 5 Claims will receive the recoveries set forth in the chart annexed hereto as Exhibit D. The holders of Class 5 General Unsecured Claims are impaired, and are entitled to vote on the Plan. 6 Affiliate Claims (amount unknown) Impaired The holders of Class 6 Claims are T. Kangadis, Aristidis Kangadis, Andromahi Kangadis, and KFM. The Allowed Class 6 Claims shall be subordinated solely in right of payment, but not the right of setoff or any defenses, to the Distributions to holders of Class 4 and 5 Claims. Holders of Allowed Class 6 Claims shall not receive any Distributions under the Plan. After the Distributions to Class 4 and 5 claimants are completed, the Reorganized Debtor shall be permitted to pay the subordinated Class 6 Claims. Class 7 Interest Holders Interest holders are Persons which hold an ownership interest in the Debtor. The Interests in the Debtor are held by T. Kangadis, Aristidis Kangadis, and Andromahi Kangadis. As of the Effective Date, all Interests in the Debtor will be cancelled and extinguished. In consideration for the Kangadis Contribution, T. Kangadis will receive 100% of the new stock issued in the Reorganized Debtor. Except for T. Kangadis, no Class 7 Interest Holder shall receive any Cash or property under the Plan. Holders of Class 7 Interests are not entitled to vote on the Plan, and are deemed to have rejected the Plan. 15

16 Claims and Interests Not Impaired Under the Plan The term "impaired" as used below shall have the same meaning as it has pursuant to Bankruptcy Code Holders of Administrative Expenses, Priority Tax Claims, and Class 3 (Other Secured Claims) are not impaired and shall be paid in full, on the Effective Date. Class 3 is not impaired under the Plan and, therefore, Class 3 is deemed to accept the Plan. Claims and Interests Impaired Under the Plan Claims in Classes 1, 2, 4, 5 and 6, and Class 7 Interests, are impaired under the Plan. The holders of Claims in Classes 1, 2, 4, 5, and 6 are entitled to vote on the Plan. Class 3 is not impaired and shall be deemed to have accepted the Plan. Class 7 is deemed to reject the Plan. VI. MEANS FOR IMPLEMENTATION OF THE PLAN No later than two (2) business days before the Effective Date, (i) the Debtor shall deposit into a separate account the Effective Date Payment consisting of approximately $1,082,000.00, and (ii) if Allowed Class 4 and Class 5 Claims will not be paid in full, with interest, then $500, of the Kangadis Contribution shall be paid to the Debtor. In addition, as soon as practical after the Effective Date, KFM shall repay the Debtor the $684, debt that it owes the Debtor. The above Cash and payments will be used by the Debtor to fund the payments required under the Plan. On the Effective Date, the Debtor will have sufficient Cash to pay in full the following amounts required to be paid under the Plan: U.S. Trustee s fees and any applicable interest; Allowed Priority Tax Claims and Priority (Non-Tax) Claims; and Allowed Administrative Expenses, including Fee Claims (except to the extent that the holders of Administrative Expenses or Fee Claims agree to different treatment). Fee Claims do not include the claims for attorneys fees and costs which might be asserted by Bursor & Fisher. In addition, to the extent necessary to make the payments required under the Plan, beginning on June 30, 2015, the Debtor will pay from the cash flow generated from its operations an aggregate of $200, per quarter for up to two (2) years to fund the GUC Fund and the Class Action Fund in accordance with the Plan. The Debtor s unaudited financial projections indicate that the Debtor will have the ability to timely make all of the payments required under the Plan. (The Debtor s projections are annexed hereto as Exhibit C). On the later to occur of (a) the Effective Date, and (b) the date such Claim becomes Allowed by a Final Order of the Bankruptcy Court, or as soon thereafter as is reasonably practicable, the Debtor or the Reorganized Debtor shall use available Cash to pay in full, or establish appropriate reserves for Allowed Administrative Expenses, including Fee Claims, except as otherwise agreed to by the holder thereof and the Debtor. The Debtor or the Reorganized Debtor shall not be required to establish reserves with respect to the Class Claim, or any attorneys fee claim of Bursor & Fisher. 16

17 The Reorganized Debtor shall pay all Priority Tax Claims and Priority (Non-Tax) Claims, in accordance with Article III of the Plan. Article V of the Plan sets forth the means for implementing the Plan and the method for making Distributions under the Plan. As set forth in Articles III and V of the Plan, the Class Administrator shall make all Distributions to holders of Class 4 Claims under the Plan. Quarterly Reports. Until the Chapter 11 Case is closed the Debtor shall file quarterly reports setting forth (a) the status of Distributions to holders of Allowed Class 5 Claims, and (b) the status of any Avoidance Actions. The quarterly reports shall be filed on or before the 15 th day of July, October, January and April. In addition, the Debtor shall maintain an accurate register of the Class 5 Claims. Vesting of Assets. As of the Effective Date, pursuant to provisions of Bankruptcy Code 1141(b) and (c), all property and assets of the Debtor, except for the GUC Fund and the Class Action Fund, shall be transferred to and shall vest in the Reorganized Debtor free and clear of all Liens, Claims and Interests, except as otherwise expressly provided in this Plan, and the Confirmation Order. Continuing Existence. From and after the Effective Date, the Reorganized Debtor will continue in existence and shall continue normal operations of its business as a corporation under the applicable laws of the state of New York. Post-Consummation Implementation. On the Effective Date, all relevant parties (including the Debtor, the Reorganized Debtor, and Citibank any new lender that refinances Citibank s loan) will take all actions necessary to cause title to the Debtor s assets to be transferred to the Reorganized Debtor, and for the termination of any security interests, or Uniform Commercial Code filings, after the payment in full of any secured claims. Promptly after substantial consummation of the Plan, the Debtor shall file the Closing Report in accordance with Local Bankruptcy Rule , within the deadlines set forth therein, and an application for a Final Decree. Professionals. The Reorganized Debtor may retain and compensate professionals, including professionals who have been or are currently retained as Estate professionals without approval from the Bankruptcy Court. VII. EXECUTORY CONTRACTS AND LEASES Any executory contract or unexpired lease of the Debtor which has not been assumed or rejected by Final Order of the Bankruptcy Court, or which is not the subject of a pending motion to assume or reject on the Confirmation Date, shall be deemed assumed by the Debtor on the Effective Date. Any entity with a Claim that arises from the rejection of an executory contract or unexpired lease must file its Claim within thirty (30) days after the date of the order rejecting the executory contract or unexpired lease, and shall have the same rights as a Class 5 Claimant to the extent such Claim becomes an Allowed General Unsecured Claim. VIII. PROCEDURE FOR RESOLVING DISPUTED CLAIMS Article VII of the Plan sets forth the procedures for resolving Disputed Claims under the Plan, including the establishment of Disputed Claims Reserves for certain Disputed Claims. 17

18 IX. RETENTION OF JURISDICTION The Bankruptcy Court shall retain jurisdiction over the Debtor and the Chapter 11 Case pursuant to chapter 11 of the Bankruptcy Code and for the purposes set forth in Bankruptcy Code 1127(b), including, without limitation, with respect to the following matters: a. to enable the Debtor or the Reorganized Debtor, as applicable, to prosecute the Avoidance Actions; b. to hear and determine all Avoidance Actions, any claim or cause of action belonging to the Debtor s estate, and any disputes concerning the classification, allowance, or estimation of any Claim; c. to resolve any disputes concerning any funds held in the Disputed Claims Reserve; d. to hear and determine all disputed issues relating to a security or ownership interest in any property of the Debtor s Estate or in any proceeds thereof; e. to hear and determine all Claims arising out of any agreement entered into by the Debtor after the Petition Date; f. to recover all assets and property of the Debtor wherever located; g. to alter, modify and amend the Plan pursuant to Bankruptcy Code 1127 or to remedy any defect, cure any omissions, or reconcile any inconsistency in the Plan or Confirmation Order as may be necessary to carry out the purpose and intent of the Plan and to extent authorized by the Bankruptcy Code or Bankruptcy Rules; h. to hear and determine such other matters as may be provided for in the Confirmation Order and for the purposes set forth in Bankruptcy Code 1127(b) and 1142 or in Bankruptcy Rules 1019 and 3020(d); i. to hear and determine all applications for compensation of professionals for services rendered and expenses incurred through the Confirmation Date, including the fees and expenses of Bursor & Fisher, and thereafter to hear and determine any objections to compensation of professionals; j. to hear and determine any and all pending applications, adversary proceedings, contested matters and litigated matters; k. to hear and determine any disputed issues with respect to the payments to be made under the Plan; l. to enter orders that are necessary or appropriate to carry out the provisions of the Plan, including orders interpreting the provisions of the Plan; m. to enter a Final Order or decree concluding the Debtor s Chapter 11 Case; and n. to determine such other matters as may be provided for in the Confirmation Order, or as may be authorized under the provisions of the Bankruptcy Code. X. CONFIRMATION AND EFFECTIVE DATE Conditions Precedent to Confirmation. The following are the conditions precedent to the Confirmation of the Plan: a. The Effective Date Payment, and to the extent required by the Plan, a portion of the Kangadis Contribution, shall be deposited by the Debtor into a separate account; 18